Later today I will be traveling to Salem to propose a significant tax break to small Oregon businesses.
Governor Brown has called a Special Legislative Session, beginning on May 21. Since 2010 when annual legislative sessions were approved in Oregon, the need for frequent special sessions has declined significantly. In my five years serving you in Salem, this is only the second time a special session has been held.
The stated purpose of the gathering is to expand and clarify benefits to small businesses. Since the announcement, I’ve been working with House and Senate members to try and include our seasonal businesses like fishing, farming, and tourism. And I’ve been working tirelessly to help companies that hire part-time employees, seniors, students, and parents. More about that in a moment. First, some background.
Large corporations enjoy a preferred tax rate. Owners of smaller firms pass their income through to their personal tax filings. So basically, small businesses pay a higher tax rate than large ones do. Small firms can pay 9.9% while large ones get 7%. I have a problem with that.
Larger businesses typically organize as C Corporations. In 2013, Oregon adopted a tax break for companies organized as S Corporations and Limited Liability Corporations (LLCs). Then, in 2017, the Federal government approved tax reforms that duplicated the break for those same small businesses. Because Oregon is one of a handful of states that automatically connects state taxes to federal tax changes, local firms would receive the benefit at both the Federal and state level. The 2018 legislature evaluated those changes and concluded that because Oregon firms already get the old break on their state taxes, they should not also get a second new state break (Senate Bill 1528).
To be clear, qualifying Oregon companies get a state tax reduction under the 2013 law. They will get a new 2017 reduction on their federal taxes. But they will not get an additional 2017 reduction on their state taxes under Senate Bill 1528. No one’s taxes will increase as a result of that bill. The question is whether taxes should decrease. The Oregon Legislature decided that with one state benefit in place, we should not authorize a second, similar one which would cost the state over $200 million. Instead that money should be used for schools, health care, and public safety.
When Governor Brown approved this decision by the legislature, she also recognized that the 2013 tax reduction for S Corps and LLCs did not include a third group of small business owners – sole proprietors. She then decided on a special session to address this omission.
I’ve often said that small business is the backbone of our coastal and coast-range economies. Whether you own or work for a bed & breakfast, a retail store, a fishing boat, a restaurant or on a small farm, you know that creativity and industriousness should be recognized, empowered, and rewarded. Like many of you, I’m a small business owner myself. So the notion of a session focused on small business has my particular attention.
A special committee made up of the House Speaker, the Senate President, the Democratic and Republican leaders of the House and Senate, and the Democratic and Republican Revenue Committee Chairs is meeting early this afternoon. I’ll be there as well.
These are not easy conversations. Few in the capitol have ever risked creating a business, understand the responsibility of meeting a payroll, or as I often observe, simply own a cash register.
The problem I’m focused on is that for small business owners to receive the Oregon tax reduction, they must have at least one full-time, year-round employee. That leaves out our seasonal businesses like fishing, farming, and tourism. It ignores employers who hire part time employees, working seniors, students, and working parents.
A second problem is that most of the benefits in the current law go to higher income business owners. According to the Oregonian, “…this tax break is heavily skewed in favor of the very rich. More than two-thirds of the tax benefits flow to those who make more than $500,000 per year — business owners who rest comfortably in the confines of Oregon’s richest 1 percent. Meanwhile, Oregonians earning less than $100,000 — the vast majority of Oregonians — share a measly 1 percent of the tax benefits.” And while higher income firms save tens of thousands of dollars, smaller companies average about $150.
Finally, any new tax breaks we approve mean the state receives less revenue. And that requires cuts to education, health care, and public safety.
Since 2013, I have been arguing that we need to change our tax statutes to help our smallest businesses – those that are struggling to get on their feet, create jobs, and build a stronger future for themselves, their employees, and their communities. I’ve been arguing that we need to help little firms that will re-invest and not those already very prosperous. To be clear, I have nothing but admiration and respect for those successful firms; I just prefer to focus our resources on helping more smaller firms become similarly successful. What I am proposing is that:
We include sole proprietors together with LLCs and S Corps in the small business tax break.
We include employers with seasonal or part time employees.
We pay for the reductions by limiting the break to the first $750,000 of taxable income.
A $750,000 ceiling or “cap” on the tax benefit would be revenue neutral – neither generating new income or costing more. It would pay for including sole-proprietors and part-time employers. And it would not provide the bulk of the tax savings to higher income firms. They would have to settle on a lower tax rate for only the first $750,000.
Clearly, if your taxable small business income exceeds ¾ of a million dollars a year, you are going to be unhappy with this idea. If your spouse owns the business with you, you’ll only get the savings on the first $1.5 million. But overall, I believe our current policies are wrong and need to be fixed. The special session provides a window to fix them.
Ultimately, I’d also like to reduce tax rates for businesses with under $75,000 income each year. But that will have to be a discussion for another time. For now, I’ve been meeting with legislative leadership, discussing proposals with key decision makers, and building a coalition of legislators who agree we can make some productive and constructive changes. I’ve talked with both Democrats and Republicans. I’ve had several excellent one-on-one conversations with Governor Brown.
The Special Session and our opportunity to make a meaningful change for Oregon’s smallest businesses is evolving quickly. Thanks for staying informed.
As always, please be in touch if I can ever be of service.
Rep. Gomberg – Working for you!
address: 900 Court St NE, H-371, Salem, OR, 97301